More employers are freezing or closing pension plans

Roughly two-thirds of employers that offer traditional pensions have closed their plans to new hires or frozen them for all employees, or plan to do so in the next two years, according to a recent study.

The latest numbers show an acceleration in the decline of pensions--retirement plans in which employers, instead of employees, are responsible for investing retirement money and providing benefits. They also illustrate that the trend is no longer confined to troubled industries such as steel, auto and airlines, but now involves healthy companies.

Analysts have known for some time that the number of employers shutting or freezing their pension plans was on the rise. But the sharp increase caught some by surprise.

"This is a watershed event," said Jack VanDerhei, a Temple University pension specialist. "There has been a steady decline in traditional pensions for two decades, but the trend is really accelerating, and it's going to accelerate even more."

The survey by the industry-supported Employee Benefit Research Institute and Mercer Human Resources Consulting shows most companies that close off their pensions seek to partially offset the loss to employees by increasing contributions to firm-sponsored 401(k)'s, where employees are responsible for managing their own retirement money.

But critics say the increases do not make up for the demise of pensions.

The benefits of 401(k)'s "are not measuring up," said David Certner, legislative policy director for AARP, the giant services and lobbying organization for senior citizens. "There are a lot more ways people can get tripped up with 401(k)'s than with traditional pensions."

The pace of pension actions surprised some observers because employers seemed to have weathered the worst of their financial problems.

During the booming 1990s, a rising stock market raised the value of plans' investments so much that collectively the plans had to contribute only about $30 billion a year to ensure they could meet their obligations to future retirees.

But in 2000, two things happened: The stock market crashed, slashing the value of investments, and interest rates sank. Declining interest rates reduced the return on their investments, forcing the plans to set aside more funds to meet future benefit obligations.

The combination raised the amount that plans collectively had to set aside to about $90 billion a year and dramatically increased the number of plans that were considered "underfunded" and unable to meet their future obligations.

But the number of underfunded plans has come down in the last four years and, by some measures, the pension system as a whole is back in financial balance, analysts said.

One of the key items that has pushed employers to get out from under their pension plans is a new law, the Pension Protection Act, designed to stabilize the pension system.

Many employers queried by EBRI and Mercer cited the law in explaining their decisions.

Nearly 30 percent of those who said they planned to freeze or close their plans in the next two years cited uncertainty about the law as contributing to their decisions. More than half said their belief that the law would raise costs was key to their decision.

"Companies hate uncertainty, and this law has created a lot of uncertainty," said Mauricio Soto, a research economist with Boston College's Center for Retirement Research.

The survey found 25 percent of employers questioned had closed pensions to new hires within the last two years, while nearly 13 percent had frozen their plans for all employees. The survey found that more than 30 percent of employers expected to make similar changes in the next two years. The survey questioned 162 employers, including some of the nation's largest companies.

The pension freezes and closures raises anew the question of whether Baby Boomers are financially ready to retire.

Some studies have suggested that Baby Boomers are not as ill-prepared as many think, and that a combination of pensions, 401(k)'s and home equity, together with Social Security, would see them through old age.

But EBRI analysts suggested those studies might need to take a fresh look in light of the new survey's results.

"It appears that any careful analysis of retirement income adequacy . . . must be modified substantially to factor in the extraordinary plan changes among [pension] sponsors in the last few years," analysts said.

"What you're seeing is the slippage of the middle class," said Certner of AARP. "Their retirement benefits are much smaller than those of the previous generation that had traditional pensions."

Peter G. Gosselin is a staff reporter for the Los Angeles Times, a Tribune Co. newspaper.